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Do you have an emergency corpus for a rainy day?
Published On , 26 Jul 2016 By Times Of India
One of the often neglected financial Goals in one’s financial life is putting in place an emergency fund, also referred to as a contingency fund. This is a must because you never know when you would need some extra money, in a hurry, because of some unforeseen events. One of the rules for putting in place an emergency fund is that your investments should be in such instruments you are able to tap that corpus very quickly. Putting some money in a bank fixed deposit is one of the solutions. You could also consider investing in a Liquid Fund or an ultra short term fund of a good mutual fund house which can serve the same purpose and yet give you a slightly higher post-tax return than comparable instruments if you are in the highest income tax bracket.
WHY AN EMERGENCY FUND?
You may require some funds to meet some medical emergency in the family. It could also be a case where because of a job loss or a setback in your business, your regular source of income dries up and yet you need some funds to meet your family’s monthly expenses. In such a situation you should be able to tap into a corpus without curtailing your investments which are meant for your long term Goals like child’s education and marriage, your own retirement etc.
WHAT SIZE AN EMERGENCY FUND?
According to financial planners and advisors, to zero in on the optimum size of your emergency fund, you should do some reverse engineering. For a salaried individual or who is in a business, usually the size of the corpus could be equal to the monthly expenses of three-six months.
HOW TO BUILD AN EMERGENCY FUND?
Although bank FDs provide adequate liquidity and could be tapped into in case of emergency, you should consider building the contingency fund using the Liquid Fund route. In addition to slightly higher post-tax returns that you can enjoy in liquid and ultra short term funds, you also do not pay any penalty when you withdraw the money, unlike in FDs where you may have to pay a penalty for premature withdrawal. In addition to regular modes of withdrawal from their schemes, fund houses have also started SMS registration for liquid schemes, which has made withdrawal from these funds even smoother. While building an emergency fund, you should keep in mind that while liquid or ultra short term funds are the ideal instruments for meeting short term financial Goals like emergency funds, but you should never use an Equity fund for meeting such Goals.
EMERGENCY FUND AND AGE OF INVESTORS
If an aged person does not have a medical insurance, the size of the contingency fund should be a large one, financial planners and advisors said. On the other hand, in case of a young person with regular salary income who also has a mediclaim policy, the corpus could be for only meeting expenses in case of a job loss or in case of some other incident that could prevent him/her from working.
A PRIMER ON Liquid FundS, ULTRA SHORT TERM FUNDS
These funds invest mainly in money market instruments like treasury bills, certificates of deposit, commercial papers and term deposits with maturities of up to three months. Hence, under normal circumstances there is not much impact of interest rate volatility in the economy on these funds.
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